New Mortgage Rules Announced

Update: For the latest mortgage rules tightening announcement on June 21, 2012 – click here

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Canada has a “prudent mortgage market and responsible lending practices…our governments ongoing monitoring and sound supervisory regime along with the traditionally cautiously prudent approach taken by Canadian financial institutions to mortgage lending has allowed Canada to maintain strong and secure housing and mortgage markets.  This has also allowed Canada to avoid housing bubbles witnessed elsewhere,” said Mr. Flaherty at a live televised announcement earlier this morning.

The following additional measures were implemented to tackle the issue of burgeoning household debt:

  • Mortgage amortization periods will be reduced to 30 years from 35 years (for high-ratio loans)
  • The max Canadians can borrow to refinance their mortgages will be lowered to 85% from the current 90%
  • The government will withdraw its insurance backing on lines of credit secured on homes (HELOCs)

There were no changes to the minimum downpayment, nor any changes to qualifying condominium buyers as previously speculated.

Adjustments on amortization and refinancing limits come into force on March 18. Government backing on HELOCs will be removed as of April 18.

Do you think this will cause a surge in buyers with the deadline two months away, or has the buyer pool already been exhausted?

Source: Department of Finance Canada (click to enlarge)

Previous Mortgage Rule Changes

In October 2008, the Government adjusted its minimum standards for the mortgage insurance guarantee framework, including:

  • Fixing the maximum amortization period for new government-backed insured mortgages to 35 years.
  • Requiring a minimum down payment of five per cent for new government-backed insured mortgages.
  • Establishing a consistent minimum credit score requirement.
  • Requiring the lender to make a reasonable effort to verify that the borrower can afford the loan payment.
  • Introducing new loan documentation standards to ensure that there is evidence of reasonableness of property value and the borrower’s sources and level of income.

In April 2010, the Government took additional steps:

  • Requiring that borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
  • Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes.
  • Requiring a minimum down payment of 20 per cent on non-owner-occupied properties purchased for speculation.

13 responses to “New Mortgage Rules Announced

  1. I think this will have no effect on current market trends , I believe that the pool of 1st time buyers is already exhausted. If anything I think we will see a continued slowdown of the housing market. Now the ball is in new home construction , builders might be able to offer more incentives to attract any of the 1st timers left in the market. Also sellers of the used market will have to take a better look at the prices they are asking if they need to sell. One could say that the ceiling of expectations has now been met and also forced by government actions this morning.

  2. Too bad he didn’t take it a few steps further. I think there may be a few buyers out there that will take action because of this, but not enough to call it a surge. It’ll just help the current deceleration.

  3. I think people will calculate it out and realize that in order to make the same amount in monthly payments with 30 years amortization and speculation of interest rate increases, the price of houses must fall. So, I think people will wait and see what happens.

  4. A little further to the above post:

    Flaherty predicted the measures will have “some moderating” impact on the housing market.

    He said the changes will not take effect immediately because of a requirement to give the industry 60 days notice before making policy changes of this nature.

    He said past experience suggests there is no need to fear a rush on 35-year mortgages before the new rules take effect.

    There was also a post-announcement interview where he answered some questions here (Link to video)

  5. There is still a budget ahead, for my money the mortgage changes will consist of 2 parts, todays announcement being part 1, the budget being part 2.

  6. I think we will see a surge in activity, though it will be much less pronounced than 2010.

    As buyers will misguidedly jump into the market to get the old allowable CMHC terms, so too will smart sellers who see this as an opportunity to sell into a bid.

    Unfortunately for the sellers however they will be joined by all those who held their property off the market in 2010 waiting for a sellers market in spring 2011.

    That’s my take.

  7. I have to feel a sense of relief from these changes as I have looked at a few nice properties lately that were last purchased in 2007 or earlier, and the sellers are essentially trying to get 95% or more of their purchase price back. At least 60 days from now if I put in a bid I know I will not be competing against someone who would have in the past used a 40 or 35 year amortization to out bid me.

    On other side effect is those who actually took 40 year terms and now have to renew into a 30 year term. Could be hard to get to 5% down if their house has dropped in price, which it may well have.

  8. Good point Shenyyc,

    New mortgage rules will pose another obstacle to refinancing for those who took out 5 year terms in 2006, 2007.

    Two problems will come to light this year (at least in the AB market, for other provinces this will be a little further down the road):

    1) Refis with new rules may push borrowers over debt thresholds. Even if they are approved for the loans they will be at greater risk for foreclosure.

    2) Refis of high ratio 06/07 mortgages will likely be underwater, let alone at 15% equity.

    On point 2: the question I have is when will banks stop refinancing underwater mortgages? I have seen the topic of moral hazards created by CMHC insurance as it applies to lending standards but I have yet to see any discussion around the moral hazard of banks lending money on underwater homes using CMHC insurance for individuals that are current on their loans and refinancing at the end of term. I know this happens as I have two friends working with the big banks and discuss housing with them regularly. This is a circumvention of CMHC rules, and I would bet it is done with the consent of the government (why make a price problem worse by pushing homes into foreclosure?).

    The problem with this is that as houses continue to fall in price taxpayers will be on the hook for mortgages that are further underwater then they would have had the banks enforced CMHC rules at the time of refinancing.

  9. TD Economics released a research note on the new changes:

    The amortization change may alter the quarterly profile of housing market activity as some sales are pulled forward by households to pre-empt it. But the impact is not expected to be large, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010, and prices to slip by a modest 1%.

    On aggregate, our calculations suggest that 20K sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point.

    However, while the last few months of data represented upside risk to our December forecast, today’s measures put our forecast back on track.

    Read the entire release here

  10. i am leaning towards ‘ALE’ thinking. A small surge of sales ahead of the actual tightening date, then a correction of reduced sales.

    If the buyer thinks ‘Now’ is the best time to buy ahead of monetary policy change, they will go ahead and do it. The sheep follow the herd. Its funny in this instance though, this monetary change of going to 30yr mortgage Vs 35yr is actually better for them overall, as paying less interest over the term.

    2 comments:
    1 – For those that state the New Buyers are exhausted. There are now 12 months of new first time buyers from the 2010 sales spike. every year, there is a brand new group of buyers to sell to.
    2 – The Effective date is March 2011. Can consumers get Pre-approved for a 5/35 mortgage days before the rule change, and then have 90 days to secure that 5/35 financing?? ? (so June cut-off) or will it be immediate for all consumers on that march date?

  11. Another take on the changes, this time from BMO Capital Markets:

    Senior economist Michael Gregory thinks the new mortgage rules represent a “significant” change for home buyers that should soften demand for homes. By his calculations, the rules will have an economic impact equivalent to lowering the Bank of Canada’s benchmark lending rate by slightly more than half a percentage point.

    Gregory also has some interesting thoughts on the timing of Flaherty’s announcement:

    “Before this weekend, the speculation had been that tighter mortgage insurance rules would be included in the upcoming federal budget. However, there is a risk that the budget could become a catalyst for a federal election (meaning the budget wouldn’t pass), and these measures were obviously deemed too important not to be passed and put in place for when Canada’s housing market wakens from its winter slumber in a couple months.” Source

  12. “As buyers will misguidedly jump into the market to get the old allowable CMHC terms, so too will smart sellers who see this as an opportunity to sell into a bid.

    Unfortunately for the sellers however they will be joined by all those who held their property off the market in 2010 waiting for a sellers market in spring 2011.

    That’s my take.”

    Agreed Ale. I think the sheep will run to the cliff asap and will of course bring forward even more future sales. When interest rates rise, prices will take a bigger hit since remaining buyers “rushed” in and of course interest rates and prices have an inverse relationship.

    Hard to believe TD thinks prices will only drop 1%….it will definitely be more than that.

  13. Well, it’s a no brainer just looking at the chart on how much is saved by having a 30 year amortization vs. a 35 year amortization.

    You’re gonna be saving thousands of dollars!!!

    I’d say we cut it even further back to 25 years! We’d be saving even more money on interest!!!

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